Retail Investors Branch Out, Drive Firms’ Growth

June 9, 2014

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Money managers have reported seeing increased
inflows into multi-asset and alternative investments from non-institutional
clients, and many believe this trend represents the beginning of a permanent
shift.

While institutional investors are still betting
on multi-asset and alternative investing strategies, the rate at which retail
investors are doing so is growing faster.

Indeed, in terms
of cash flow, multi-asset products and alternative assets continue to show
significant growth that outpaces most other investment products, and the
biggest source of such growth is from retail investors.

One reason is
that retail investors are becoming more outcome-oriented, especially since the most
recent financial crisis, and this evolving outlook has led them into multi-asset
and alternative strategies.

Another factor
though is simply that the success of institutional investment in multi-asset
and alternatives has spilled over into retail, as asset managers have launched
several new multi-asset and alternatives mutual funds in the past few years not
only to accommodate but also fuel retail demand.

Of course, the
growth in retail relative to institutional can seem a bit exaggerated, since many
institutional investors already have multi-asset allocations, while such
strategies are still new to a good many retail investors. Also, there are also
more strategies — such as global macro, event-driven and arbitrage approaches —
which compete for investment dollars
within this portion of institutional investors' portfolios.

Nonetheless, multi-asset
is an area that's seen significant growth in absolute terms in the retail
sector, as financial advisors have begun using these products more and more as
a core component of their portfolio.

For example, BlackRock
had retail long-term net inflows of $14 billion in the first quarter of this
year, including $3.6 billion into multi-asset class strategies. For comparison,
total net institutional inflows were $4.97 billion, including $1.3 billion into
multi-asset strategies.

Looking back a
bit more, BlackRock experienced net retail inflows of $16.59 billion and $8.34
billion during its fourth and third quarters of 2013, respectively, while it
saw institutional net inflows of $4.8 billion in the fourth quarter of last
year and net outflows of $3.31 billion in the third quarter. Total multi-asset
inflows were $17.36 billion in the fourth quarter and $4.86 billion in the
third.

Three years ago,
however, BlackRock's $208 billion in multi-asset assets under management (AUM)
— 5.7% of its total AUM as of March 31, 2011 — was driven primarily by
institutional net inflows of $12.4 billion, while retail and high net worth
clients added $2.5 billion.

Executives at
several other large money management firms were unable to break out how much of
their multi-asset and alternatives net asset flows were from retail clients
compared to institutional.

However, J.P.
Morgan Chase's first-quarter earnings statement shows that $47 billion of its
$72 billion in net inflows during the past 12 months at J.P. Morgan Asset
Management went into multi-asset and alternatives strategies. Moreover, institutional
assets under management did not change significantly on a year-over-year basis
— $773 billion out of $1.65 trillion total AUM at March 31, up only 3% from the
year-earlier period. Its retail and private banking assets, though, went up 26%
and 11%, respectively.

The upshot of
all of this is further evidence that not only multi-asset and alternative flows
from non-institutional clients are growing not only within various individual
companies but across the industry as a whole, and that such growth indeed
represents a more general and more or less permanent evolution in terms of how
retail investors and their advisors think about constructing portfolios.

At bottom, perhaps,
is an increased desire for diversification while still pursuing ‘alpha’ – or market
beating return on investment – strategies, which has led high-net-worth
investors and family offices to seek out investment products geared to such
strategies which also display relatively low correlation among results.

This has meant,
and will likely continue to mean, greater demand for what were previously
considered more “institutional-quality” assets, including alternatives and
multi-assets.

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